Strategists across Wall Street's biggest banks say their investment case for US stocks remains intact despite risks posed by the Iran war.
Higher oil prices, cost-of-living concerns and an uncertain outlook for Federal Reserve interest rates have helped drive the S&P 500's worst two-week run since last April's tariff turmoil.
Still, Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. strategists point to support from earnings growth and valuations that, while still elevated, are less stretched than before.
The Goldman team said they expect the S&P 500 to eventually resume its ascent, following a historical upward pattern after instances of geopolitical risk.
"While distribution of potential outcomes is wide, the macro headwinds in our base case outlook generally appear priced, the fundamental engine of earnings growth continues to run, and valuations — while still elevated relative to history — are less demanding than they were a few months ago," Goldman's Ben Snider wrote in a note.
Morgan Stanley's Michael Wilson said that the market "got well in front of the risks that are now obvious." While noting that "we can't rule out continued volatility in the near term before final lows form," he says he is still constructive on U.S. stocks over a six-to-12 month view.
"The earnings acceleration is continuing, and the current set-up looks very different than prior late-cycle periods when an oil spike ended the business cycle," Wilson said, adding that "the bar remains high" for the oil spike to have such a severe impact this time.
Wilson has a base case year end target of 7,800 for the S&P 500, implying upside of about 18% from Friday's close. Goldman's Snider expects the benchmark to rally to 7,600.
As the war enters a third week, crude's jump has pushed Treasury yields higher and curbed bets on Federal Reserve rate cuts as inflation concerns mount. The Strait of Hormuz has become a focal point, with any prolonged disruption raising concerns about deepening global economic risks from the conflict.
Still, equity markets have so far retreated moderately since the Iran war started, with less than 20% of developed market stocks technically oversold.
"The fundamental backdrop entering the conflict was equity friendly, looking at strong activity and earnings momentum, and we do not believe that has changed dramatically," JPMorgan global strategists led by Mislav Matejka noted.
Elsewhere, equity strategists in Asia were more cautious on the potential impact of the conflict. CGS International said a prolonged war could spur a 10% to 15% drawdown in global stocks, while Emmer Capital and Gavekal Capital flagged signs of complacency in equities.
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